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Why I'm Watching XIV at $30

Two ways today's pullback in the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) could play out

by 3/3/2014 12:28:28 PM
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The VelocityShares Daily Inverse VIX Short-Term ETN (XIV) dipped to about a point below the key $30 level earlier this morning before beach-balling back above by a few pennies. Meanwhile, today's volume is running about three times the normal level.

XIV pullbacks on big volume to round-number levels have been good market-bottom indicators over the past couple of years. Even better has been when the ETN's 14-day Relative Strength Index (RSI) was touching 30.

In January, there was a "fake out" hold at $30 and then a final plunge in early February to just below $26. The big volume was there for a hold at $30, but the 14-day RSI was still well off 30, and it took that final XIV plunge for the RSI to get there.

The current situation can go either of these two ways. One possibility could be that $30 holds by the end of today and volume remains high, and the pullback (in both XIV and the broader equities market) is over. The fact that this was a geopolitical-based pullback on a Monday morning after an expiration could add up to a situation ripe for semi-panic lows being in place not long after the opening -- in other words, just a storm passing through.

Mitigating against the XIV-bottom argument is the fact that the market is coming off multiple tests of the usual resistance (the recent action of the S&P 500 relative to 1,850 and its 0% year-to-date level was not too different from that in January, before the pullback), and one could argue it's questionable for a pullback to be completed in one morning under those circumstances. Perhaps related to this is the current XIV 14-day RSI level of 42, which could set up a need (assuming $30 is broken) for a test of last month's XIV lows before XIV is sufficiently oversold to strongly indicate a bottom.

I think a lot may be riding on whether XIV can hold above $30 -- today and in the days immediately ahead.

XIV 30 and RSI 30

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